As I write this, the lawn maintenance company is cutting the grass. Not a big deal if this was May or June, but here in Michigan in the first week of April, it is something beyond my 65 years of experience. (The first grass mowing always does bring back memories of another place and time when I used to mow the lawn myself, but usually had a helper. I know, I was quite a bit slimmer then – maybe it’s time to cancel that lawn service!)
It’s just another reminder that spring has come early. And, of course, the coming of April means we have a new quarter. I don’t know about you, but I kind of hate to see the old one end. The warm temperature and sunny, summer days (up to 87 degrees in March) were quite a respite from the typical gray, 30-degree days of a Midwest first quarter.
Similarly, after last year’s first quarter choppiness and volatility, this year’s stock market performance was equally refreshing. All of the stock indices registered 10%+ gains and volatility was incredibly low.
But we can’t live in the past, and now we have a new quarter beginning. Earnings reporting season commences April 10 and we will have 30 days of company reports that will brighten or darken the eyes of every bull and bear on Wall Street.
While individual company results will, as always, vary, early indications are that the news will be on balance good. Analyst earnings revisions (the latest take of analysts tagged as experts on public firms), normally are ratcheted down entering earnings season. Skeptics, like me, suggest that this happens so that the Street can pump up stock prices when the reports exceed estimates that have been downplayed.
This quarter, however, earnings revisions have been tending more to the positive side as earnings season begins. In fact, the change over the last month in earnings revisions is the most positive it has been since December 2010. In the three months after that, the S&P gained 5.8%. And over the last four years, a rising ratio at the end of the quarter has ushered in average gains in the next quarter of 6.2% (positive results 60% of the time).
The picture is also different from the recent norm when we turn our attention to reports on the economy. Since early last fall, I have been remarking on how the economic worm has turned. (Does that count as another spring reference?) Earnings reports, which had become increasingly depressing over the summer, suddenly were beating economist expectations with regularity. I really believe that this was the fuel for the great rally in stocks that we have seen since.
Lately, however, just the opposite has been occurring. Now, this is very preliminary, but over the last two weeks, the economy as measured by these reports has stopped outperforming. Instead, of 25 reports over that period, 13 have underperformed, while only 8 have exceeded expectations (4 were in line).
This may mean that a pause in the rally could be forthcoming. But I’m not at all ready to throw in the towel on the bull market rally. From a longer-term perspective, the economy still seems to be improving. Check out the charts.
Economic reports with positive year-over-year improvement are at their highest level of the last 12 months. And looking at the inflation numbers, oil prices notwithstanding, they remain in a downward trend. This is positive because inflation is like a tax increase – a drag on the economy. Furthermore, lower inflation numbers give the Federal Reserve room to continue an accommodative stance on money supply and put off the day when interest rates will have to move higher.
Finally, in the economic core sector of manufacturing, the picture seems bright:
Just today, this view was reinforced as the ISM manufacturing report was released and the results were better than expected. So all in all, while the last two weeks indicate caution, the economy remains supportive of a continuance of the bull market rally.
Of course, the financial wires continue to refer to more negative influences on the market. One story headlined that Dr. Doom (so named for his seemingly constant gloomy outlook), Dr. Marc Faber, was saying that “‘Massive Wealth Destruction’ is about to hit investors.” Yet, reading the story discloses that for the time being he’s recommending stocks!
Other commentators warn of a correction and a pause due to myriad causes: further coming problems in Europe, the end of Fed easing, and a slowdown in China. As I have been saying, however, while a correction can come at any time (witness three down days last week), most investors and many advisors still have not gotten on board this bull market. The fact that they are looking for an opportunity to do so is, in my opinion, one more reason why this rally should have further legs.
Other reasons abound, but none more than the seasonal factors. This week, the first two weeks of April, and the month itself all have very positive histories. You might not expect it, since the month brings with it tax day, but April over the past 50- and 20-year periods has been the strongest stock market month of the year. Even over the last 100 years, it ranks third.
At this time of the year, as Opening Day approached, the late, great Tiger baseball broadcaster, Ernie Harwell, would always recite these lines from the “Song of Solomon” 2:11-12:
For, lo, the winter is past,
The rain is over and gone;
The flowers appear on the earth;
The time of the singing of birds is come,
And the voice of the turtle is heard in our land.
Here’s Ernie: http://www.youtube.com/watch?v=Gr0T9c8SEUk
As a long-time Tiger season ticket holder, I’m off to Opening Day on Thursday. Many are picking the Tigers to win it all this year. And, it’s supposed to be sunny and in the 50′s. Not a time for Dr. Doom, rather a time to watch the Tigers while the stock market climbs higher on the wall of worry constructed mainly by those left behind.
All the best,
Jerry